Activists put CEOs in a fishbowl

Columbia University freshman Nick Serpe doesn't own any stocks or mutual funds, but that minor point isn't keeping him from becoming a shareholder activist.

"The tuition we pay is going to the university endowment, so we do consider ourselves shareholders," says Mr. Serpe, who had never heard of shareholder activism six months ago. Together with other students, he's now calling on Columbia to use its clout as a big Chevron stockholder to solicit a report that would address, among other things, pollution caused by nearly three decades of oil drilling in Ecuador.

As winter winds down, activists of varied stripes are gearing up for a new spring season of shareholder meetings by linking up with allies and upgrading their approaches. They're tapping into new networks, formed in the past three years, to rally grass-roots investors behind various causes. They're also reaping the benefits of new disclosure requirements intended to demystify mountains of paperwork and legalese that have traditionally enshrouded the inner workings of corporate boards.

In the big picture, observers say, a multiyear trend toward holding management accountable is to some degree trickling down to strengthen the hand of those who actually own public companies: their shareholders. Corporate scandals in 2002 and 2003 led not only to the Sarbanes-Oxley Act, which tightened financial reporting requirements, but also to today's environment where investors can more easily make their voices heard.

"Sarbanes-Oxley essentially empowered directors" to oversee management more effectively, says Carol Bowie, vice president of governance research services for Institutional Shareholder Services, an advisory firm. "But shareholder empowerment is what's going on right now.... We are seeing directors respond to shareholders, and directors don't like to get low votes [on annual meeting agenda items]. So they respond to that."

Executive pay packages examined

This year, shareholders driven by social and financial concerns alike are targeting executive pay packages. Efforts to rein in compensation formulae have spawned 239 proposals, up from 175 in 2006, according to a mid-February ISS analysis. Nearly 1 in 4 of all 984 proposals filed at public companies this year addresses executive compensation.

Median cash income for CEOs climbed from $1.8 million in 2002 to $2.4 million in 2005, according to the most recent Mercer Human Resource Consulting survey of 350 large public companies. Total compensation packages, which include such long-term incentives as restricted stock, climbed from a median of $6.1 million to $6.8 million over the same three-year period.

From the first meetings in March until the season winds down in late June, shareholders will be debating how to keep the boss from being overpaid. Should CEO compensation be subject to shareholder review before a board gives its approval? Should pay-for-performance incentive programs be restructured to get better results? Proposals vary from firm to firm, but all seem designed at least to blunt a repeat of Home Depot's 2006 payoff. CEO Robert Nardelli, who failed for six years to boost the company's stock price, ultimately resigned with a $200 million severance package.

Besides highlighting such cases, activists should also benefit from new SEC rules, requiring companies to disclose total CEO compensation in one location where it's easy to decipher.

Mr. Ward also expects shareholders to review executive perks – such as private jet travel – more carefully now that firms must reveal all such expenses in excess of $10,000.

Ward notes that this year's raft of pay-related initiatives almost exclusively target firms that have performed weakly. That's because he says shareholders can generally stomach big salaries, generous stock options, and perks for leaders when an organization is thriving. Conversely, he says activist shareholders are most likely to agitate and prevail this year at the likes of Hewlett-Packard, United Health, and other companies eager to improve board oversight in the wake of reports highlighting governance problems.

"Only companies that have found themselves in trouble are the ones who are the trail blazers" in embracing reform, Ward says. "Essentially, they're vulnerable. They're the weakest of the herd. If you're trying to get some governance change put in, they're the ones that you go to."

In principle, shareholders big and small alike have a voice in how a company is run. Each gets to vote on proposals that come before the annual shareholder meeting. If a shareholder can't attend the meeting, he or she may vote by proxy by filling out a ballot that arrives via postal delivery or e-mail, usually in February or March. Investors in mutual funds may "vote" by urging the fund, through its investor-relations office, to vote a certain way on resolutions pending at firms in which the fund is a stakeholder.

Still, even with new regulations increasing boardroom transparency, corporate America is no democracy. Shareholder votes are purely advisory and nonbinding upon a board of directors. What's more, because big shareholders get more votes than small ones, institutional investors such as mutual funds and pension funds tend to carry the most influence.

"I don't think that, as an individual investor, unless you're [billionaire activist] Carl Icahn, you're going to have much impact," says Jay Eisenhofer, a Wilmington, Del., lawyer who represents institutional shareholders and is author of "Shareholder Activism Handbook" (Aspen, 2005). "It's just not a realistic sort of goal.... You're much more likely to have an impact by having an association with an institution and influencing them to take action."

Investors with a social-change agenda

Increasingly, stakeholders are organizing with hopes of steering institutions to use their stock to advance an agenda. Retirees from Verizon and Qwest Communications, for instance, last year lobbied their respective boards to rein in rosy assumptions used in calculating a top executive's compensation package. Labor unions and the Sierra Club have embarked on new outreach efforts in the past two years to educate members about letter-writing campaigns and other tactics for influencing corporate directors. Amnesty International is beefing up its year-old Share Power campaign, which equips activists in about 30 groups with tools and strategies to nudge institutions to vote with human rights in mind.

"Because of the enormous power of multinational companies around the world ... we cannot have human rights gains without their cooperation," says Amy O'Meara, coordinator of Share Power. She's hopeful, she says, because with the rise of globalization "companies are really realizing that they are connected to these issues in ways that they weren't 20 years ago."

For investors interested in social issues, 327 resolutions at companies are awaiting action this spring. Many call for corporate reports on one of two issues: a firm's environmental impacts, such as having a role in global warming, or its political contributions. Among other closely watched issues is whether shareholders will gain more say in processes for nominating and approving directors who represent their interests on a governing board.

As shareholder activists learn to raise their voices, observers differ on whether the movement is coming to fulfill its potential as a force for positive social change. In the optimistic camp: the Rev. Michael Hoolahan, interim director of the Interfaith Center on Corporate Responsibility, where shareholder activism has been a priority since its inception in 1971.

"We see a burgeoning movement," Father Hoolahan says. "There are many, many new voices [over] what there were 10 years ago. It's really blossomed."

Don't throw that proxy away

But activism consultant Bartlett Naylor sees a wealth of untapped power. Too often, he says, people otherwise interested in improving their society discard their proxy ballots as junk mail.

"It remains disappointing to me how much the average guy remains oblivious to the fact that the major force shaping public policy in America is the corporation," says Mr. Naylor, principal of Capital Strategies Consulting in Arlington, Va. "And the one time that the average guy has something to say something about that, he is throwing that chance into the trash."